CHARTER COMMUNICATIONS, INC. /MO/ (CHTR) 10-K. Annual report pursuant to section 13 and 15(d) Filed on 03/01/2011 Filed Period 12/31/2010

Transcription

1 CHARTER COMMUNICATIONS, INC. /MO/ (CHTR) 10-K Annual report pursuant to section 13 and 15(d) Filed on 03/01/2011 Filed Period 12/31/2010

2 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2010 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period From to Commission File Number: Charter Communications, Inc. (Exact name of registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification Number) Powerscourt Drive St. Louis, Missouri (314) (Address of principal executive offices including zip code) (Registrant s telephone number, including area code) Securities registered pursuant to section 12(b) of the Act: Title of each class Name of Exchange which registered Class A Common Stock, $.001 Par Value NASDAQ Global Select Market Securities registered pursuant to section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No o Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o Indicate by check mark whether the registrants have submitted electronically and posted on their corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T ( of this chapter) during the preceding 12 months (or for such shorter period that the registrants were required to submit and post such files). Yes o No o Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K ( of this chapter) is not contained herein, and will not be contained, to the best of registrant s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of accelerated filer, large accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one): o Large accelerated filer þ Accelerated filer o Non-accelerated filer Smaller reporting company o Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ The aggregate market value of the registrant of outstanding Class A common stock held by non-affiliates of the registrant at June 30, 2010 was approximately $1.3 billion, computed based on the closing sale price as quoted on the OTC Bulletin Board on that date. For purposes of this calculation only, directors, executive officers and the principal controlling shareholders or entities controlled by such controlling shareholders of the registrant are deemed to be affiliates of the registrant.

3 APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes þ No o There were 114,566,527 shares of Class A common stock outstanding as of January 31, There were no shares of Class B common stock outstanding as of the same date. Documents Incorporated By Reference Information required by Part III is incorporated by reference from Registrant s proxy statement or an amendment to this Annual Report on Form 10-K to be filed by April 30, 2011

4 CHARTER COMMUNICATIONS, INC. FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2010 TABLE OF CONTENTS PART I Page No. Item 1 Business 1 Item 1A Risk Factors 16 Item 1B Unresolved Staff Comments 27 Item 2 Properties 28 Item 3 Legal Proceedings 28 PART II Item 5 Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 31 Item 6 Selected Financial Data 34 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 35 Item 7A Quantitative and Qualitative Disclosure About Market Risk 61 Item 8 Financial Statements and Supplementary Data 63 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 63 Item 9A Controls and Procedures 63 Item 9B Other Information 63 PART III Item 10 Directors, Executive Officers and Corporate Governance 64 Item 11 Executive Compensation 64 Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 64 Item 13 Certain Relationships and Related Transactions, and Director Independence 64 Item 14 Principal Accounting Fees and Services 64 PART IV Item 15 Exhibits and Financial Statement Schedules 65 Signatures S-1 Exhibit Index E-1 This annual report on Form 10-K is for the year ended December 31, The Securities and Exchange Commission ( SEC ) allows us to incorporate by reference information that we file with the SEC, which means that we can disclose important information to you by referring you directly to those documents. Information incorporated by reference is considered to be part of this annual report. In addition, information that we file with the SEC in the future will automatically update and supersede information contained in this annual report. In this annual report, we, us and our refer to Charter Communications, Inc. and its subsidiaries. i

5 CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS This annual report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, which we refer to as the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, which we refer to as the Exchange Act, regarding, among other things, our plans, strategies and prospects, both business and financial, including, without limitation, the forward-looking statements set forth in Part I. Item 1. and in Part II. Item 7. under the heading Management s Discussion and Analysis of Financial Condition and Results of Operations in this annual report. Although we believe that our plans, intentions and expectations reflected in or suggested by these forward-looking statements are reasonable, we cannot assure you that we will achieve or realize these plans, intentions or expectations. Forward-looking statements are inherently subject to risks, uncertainties and assumptions, including, without limitation, the factors described in Part I. Item 1A. under the heading "Risk Factors" and in Part II. Item 7. under the heading, Management s Discussion and Analysis of Financial Condition and Results of Operations in this annual report. Many of the forwardlooking statements contained in this annual report may be identified by the use of forward-looking words such as believe, expect, anticipate, should, planned, will, may, intend, estimated, aim, on track, target, opportunity, tentative, positioning and potential, among others. Important factors that could cause actual results to differ materially from the forward-looking statements we make in this annual report are set forth in this annual report and in other reports or documents that we file from time to time with the SEC, and include, but are not limited to: our ability to sustain and grow revenues and free cash flow by offering video, high-speed Internet, telephone and other services to residential and commercial customers, to adequately meet the customer experience demands in our markets and to maintain and grow our customer base, particularly in the face of increasingly aggressive competition, the need for innovation and the related capital expenditures and the difficult economic conditions in the United States; the impact of competition from other market participants, including but not limited to incumbent telephone companies, direct broadcast satellite operators, wireless broadband providers, and digital subscriber line ( DSL ) providers and competition from video provided over the Internet; general business conditions, economic uncertainty or downturn, high unemployment levels and the level of activity in the housing sector; our ability to obtain programming at reasonable prices or to raise prices to offset, in whole or in part, the effects of higher programming costs (including retransmission consents); the effects of governmental regulation on our business; the availability and access, in general, of funds to meet our debt obligations, prior to or when they become due, and to fund our operations and necessary capital expenditures, either through (i) cash on hand, (ii) free cash flow, or (iii) access to the capital or credit markets; and our ability to comply with all covenants in our indentures and credit facilities, any violation of which, if not cured in a timely manner, could trigger a default of our other obligations under cross-default provisions. All forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by this cautionary statement. We are under no duty or obligation to update any of the forward-looking statements after the date of this annual report. ii

6 PART I Item 1. Business. Introduction We are among the largest providers of cable services in the United States, offering a variety of entertainment, information and communications solutions to residential and commercial customers. Our infrastructure consists of a hybrid of fiber and coaxial cable plant passing approximately 11.8 million homes, with 98% of homes passed at 550 megahertz ( MHz ) or greater and 97% of plant miles two-way active. A national Internet Protocol (IP) infrastructure interconnects all Charter Communications, Inc. ( Charter ) markets. See "Item 1. Business Products and Services" for further description of these terms and services, including "customers." For the year ended December 31, 2010, we generated approximately $7.1 billion in revenue, of which approximately 52% was generated from our residential video service. We also generated revenue from high-speed Internet, telephone service and advertising with residential and commercial high-speed Internet and telephone service contributing the majority of the recent growth in our revenue. As of December 31, 2010, we served approximately 5.1 million customers. We sell our video, high-speed Internet and telephone services primarily on a subscription basis, often in a bundle of two or more services, providing savings and convenience to our customers. Bundled services are available to approximately 97% of our homes passed, and approximately 61% of our customers subscribe to a bundle of services. We served approximately 4.5 million video customers as of December 31, 2010, of which approximately 74% subscribed to digital video service. Digital video enables our customers to access advanced video services such as high definition television, Charter OnDemand ( OnDemand ) video programming, an interactive program guide and digital video recorder ( DVR ) service. We also served approximately 3.2 million high-speed Internet customers as of December 31, Our high-speed Internet service is available in a variety of download speeds up to 60 megabits per second ( Mbps ). We also offer home networking service, or Wi-Fi, enabling our customers to connect up to five computers wirelessly in the home. We provided telephone service to approximately 1.7 million customers as of December 31, Our telephone services typically include unlimited local and long distance calling to the U.S., Canada and Puerto Rico, plus other features, including voic , call waiting and caller ID. Through Charter Business, we provide scalable, tailored broadband communications solutions to business organizations, such as business-to-business Internet access, data networking, fiber connectivity to cellular towers, video and music entertainment services and business telephone. As of December 31, 2010, we served approximately 263,900 business revenue generating units, including small- and medium-sized commercial customers. Our advertising sales division, Charter Media, provides local, regional and national businesses with the opportunity to advertise in individual markets on cable television networks. We have a history of net losses. Our net losses are principally attributable to insufficient revenue to cover the combination of operating expenses, interest expenses that we incur because of our debt and depreciation expenses resulting from the capital investments we have made, and continue to make, in our cable properties, and in 2010, amortization expenses resulting from the application of fresh start accounting. On March 27, 2009, we and certain affiliates filed voluntary petitions in the United States Bankruptcy Court for the Southern District of New York (the Bankruptcy Court ), to reorganize under Chapter 11 of the United States Bankruptcy Code (the Bankruptcy Code ). The Chapter 11 cases were jointly administered under the caption In re Charter Communications, Inc., et al., Case No On May 7, 2009, we filed a Joint Plan of Reorganization (the Plan ) and a related disclosure statement with the Bankruptcy Court. The Plan was confirmed by the Bankruptcy Court on November 17, 2009 (the Confirmation Order ), and became effective on November 30, 2009 (the Effective Date ), the date on which we emerged from protection under Chapter 11 of the Bankruptcy Code. The terms Charter, we, our and us, when used in this report with respect to the period prior to Charter s emergence from bankruptcy, are references to the Debtors ( Predecessor ) and, when used with respect to the period commencing after Charter s emergence, are references to Charter ( Successor ). These references include the 1

7 subsidiaries of Predecessor or Successor, as the case may be, unless otherwise indicated or the context requires otherwise. Our principal executive offices are located at Powerscourt Drive, St. Louis, Missouri Our telephone number is (314) , and we have a website accessible at Since January 1, 2002, our annual reports, quarterly reports and current reports on Form 8-K, and all amendments thereto, have been made available on our website free of charge as soon as reasonably practicable after they have been filed. The information posted on our website is not incorporated into this annual report. Recent Events On January 11, 2011, CCO Holdings, LLC ( CCO Holdings ) and CCO Holdings Capital Corp. completed the sale of $1.1 billion aggregate principal amount of 7.00% senior notes due The payment obligations under the notes are fully and unconditionally guaranteed on a senior unsecured basis by Charter. On January 24, 2011, CCO Holdings and CCO Holdings Capital Corp. completed the sale of $300 million aggregate principal amount of 7.00% senior notes due The notes formed part of the same series as the notes issued on January 11, Upon completion of this offering, the aggregate principal amount of outstanding notes under this series is $1.4 billion. The net proceeds of the issuances of the notes were contributed by CCO Holdings to Charter Communications Operating, LLC ( Charter Operating ) as a capital contribution and were used to repay indebtedness under the Amended and Restated Credit Agreement dated as of March 31, 2010, between Charter Operating, and various lenders thereunder. As of December 31, 2010, Paul G. Allen held all 2,241,299 shares of Class B common stock of Charter. As the holder of the Class B common stock, he was entitled to appoint four members of Charter s board of directors. Pursuant to the terms of the Certificate of Incorporation of Charter, on January 18, 2011, the Disinterested Members of the Board of Directors of Charter (as such term is defined in Charter s Certificate of Incorporation) caused a conversion of the shares of Class B common stock into shares of Class A common stock on a one-for-one basis. As a result of such conversion, Mr. Allen no longer has the right to appoint four directors and the Class B directors became Class A directors. On January 18, 2011, directors William L. McGrath and Christopher M. Temple, both former Class B directors, resigned from Charter s board of directors. Edgar Lee and Stan Parker were appointed to fill the vacant positions. On February 14, 2011, we announced that Ted Schremp, Executive Vice President, Operations and Marketing had resigned. 2

8 Corporate Entity Structure The chart below sets forth our entity structure and that of our direct and indirect subsidiaries. This chart does not include all of our affiliates and subsidiaries and, in some cases, we have combined separate entities for presentation purposes. The equity ownership percentages shown below are approximations and do not give effect to any exercise of then outstanding warrants. Indebtedness amounts shown below are principal amounts as of December 31, 2010, after giving effect to the issuance of the CCO Holdings notes in January 2011 and the application of proceeds to repay borrowings under the Charter Operating credit facilities. See Note 7 to the accompanying consolidated financial statements contained in Item 8. Financial Statements and Supplementary Data, which also includes the accreted values of the indebtedness described below. 3

9 Charter Communications, Inc. Charter owns 100% of Charter Communications Holding Company, LLC ( Charter Holdco ). Charter Holdco, through its subsidiaries, owns cable systems. As sole manager under applicable operating agreements, Charter controls the affairs of Charter Holdco and its limited liability company subsidiaries. In addition, Charter provides management services to Charter Holdco and its subsidiaries under a management services agreement. Interim Holding Company Debt Issuers. As indicated in the organizational chart above, our interim holding company debt issuers indirectly own the subsidiaries that own or operate all of our cable systems, subject to a CC VIII, LLC ( CC VIII ) minority interest held by CCH I, LLC ( CCH I ) and Charter as described below. For a description of the debt issued by these issuers please see Item 7. Management s Discussion and Analysis of Financial Condition and Results of Operations Description of Our Outstanding Debt. Preferred Equity in CC VIII. At December 31, 2010, Charter owned 30% of the CC VIII preferred membership interests. CCH I, an indirect subsidiary of Charter, directly owned the remaining 70% of these preferred interests. The common membership interests in CC VIII are indirectly owned by Charter Operating. Products and Services Through our hybrid fiber and coaxial cable network, we offer our customers traditional cable video services (basic and digital, which we refer to as video services), high-speed Internet services, and telephone services, as well as advanced video services (such as OnDemand, high definition television, and DVR service). Our telephone services are primarily provided using voice over Internet protocol ( VoIP ) technology, to transmit digital voice signals over our systems. Our video, high-speed Internet, and telephone services are offered to residential and commercial customers on a subscription basis, with prices and related charges that vary primarily based on the types of service selected, whether the services are sold as a bundle or on an individual basis, and the equipment necessary to receive the services, with some variation in prices. The following table approximates our customer statistics for video, residential high-speed Internet and telephone as of December 31, 2010 and Approximate as of December 31, December 31, 2010 (a) 2009 (a) Residential (non-bulk) basic video customers (b) 4,278,400 4,562,900 Multi-dwelling (bulk) and commercial unit customers (c) 242, ,100 Total basic video customers (b) (c) 4,520,400 4,824,000 Digital video customers (d) 3,363,200 3,218,100 Residential high-speed Internet customers (e) 3,246,100 3,062,300 Residential telephone customers (f) 1,717,000 1,556,000 Total Revenue Generating Units (g) 12,846,700 12,660,400 After giving effect to sales and acquisitions of cable systems in 2009 and 2010, basic video customers, digital video customers, high-speed Internet customers, and telephone customers would have been 4,747,300, 3,180,700, 3,039,400, and 1,554,300, respectively, as of December 31, (a) We calculate the aging of customer accounts based on the monthly billing cycle for each account. On that basis, at December 31, 2010 and 2009, "customers" include approximately 15,700 and 25,900 persons, respectively, whose accounts were over 60 days past due in payment, approximately 1,800 and 3,500 persons, respectively, whose accounts were over 90 days past due in payment, and approximately 1,000 and 2,200 persons, respectively, whose accounts were over 120 days past due in payment. (b) (c) Basic video customers include all residential customers who receive video cable services. Included within "basic video customers" are those in commercial and multi-dwelling structures, which are calculated on an equivalent bulk unit ( EBU ) basis. We calculate EBUs by dividing the bulk price charged to accounts in an area by the published rate charged to non-bulk residential customers in that market for the comparable tier of service rather than the most prevalent price charged. This EBU method 4

10 of estimating basic video customers is consistent with the methodology used in determining costs paid to programmers and is consistent with the methodology used by other multiple system operators ( MSOs ). As we increase our published video rates to residential customers without a corresponding increase in the prices charged to commercial service or multi-dwelling customers, our EBU count will decline even if there is no real loss in commercial service or multi-dwelling customers. (d) (e) (f) (g) "Digital video customers" include all basic video customers that have one or more digital set-top boxes or cable cards deployed. "Residential high-speed Internet customers" represent those residential customers who subscribe to our high-speed Internet service. Residential telephone customers represent those residential customers who subscribe to our telephone service. "Revenue generating units" represent the sum total of all basic video, digital video, high-speed Internet and telephone customers, not counting additional outlets within one household. For example, a customer who receives two types of service (such as basic video and digital video) would be treated as two revenue generating units and, if that customer added on high-speed Internet service, the customer would be treated as three revenue generating units. This statistic is computed in accordance with the guidelines of the National Cable & Telecommunications Association ( NCTA ). Video Services In 2010, residential video services represented approximately 52% of our total revenues. Our video service offerings include the following: Basic and Digital Video. All of our video customers receive a package of basic programming which generally consists of local broadcast television, local community programming, including governmental and public access, and limited satellite-delivered or non-broadcast channels, such as weather, shopping and religious programming. Our digital video services include a digital set-top box, an interactive electronic programming guide with parental controls, an expanded menu of pay-per-view channels, including OnDemand (available nearly everywhere), digital quality music channels and the option to also receive a cable card. In addition to video programming, digital video service enables customers to receive our advanced video services such as DVRs and high definition television. Charter also offers premium sports content over the Internet on charter.net. Premium Channels. These channels provide original programming, commercial-free movies, sports, and other special event entertainment programming. Although we offer subscriptions to premium channels on an individual basis, we offer an increasing number of digital video channel packages and premium channel packages, and we offer premium channels combined with our advanced video services. Customers who purchase premium channels also have access to that programming OnDemand and increasingly over the Internet. OnDemand, Subscription OnDemand and Pay-Per-View. OnDemand service allows customers to select from hundreds of movies and other programming at any time. These programming options may be accessed for a fee or, in some cases, for no additional charge. In some areas we also offer subscription OnDemand for a monthly fee or included in a digital tier premium channel subscription. Pay-per-view channels allow customers to pay on a per event basis to view a single showing of a recently released movie, a one-time special sporting event, music concert, or similar event on a commercial-free basis. High Definition Television. High definition television offers our digital customers certain video programming at a higher resolution to improve picture and audio quality versus standard basic or digital video images. We have invested and continue to invest in switched digital video ( SDV ) technology and simulcast to increase the number of high definition channels offered. Digital Video Recorder. DVR service enables customers to digitally record programming and to pause and rewind live programming. 5

11 We recently announced a multi-year agreement with TiVo, Inc. ( TiVo ) that will leverage the TiVo user interface to bring an enhanced entertainment experience to customers using a hybrid platform that leverages traditional cable and next generation IP technologies. High-Speed Internet Services In 2010, residential high-speed Internet services represented approximately 23% of our total revenues. We currently offer several tiers of high-speed Internet services with speeds up to 60 megabytes per second download speed to our residential customers via cable modems attached to personal computers. We also offer home networking gateways to these customers, which permit customers to connect up to five computers in their home to the Internet simultaneously. We are rolling out DOCSIS 3.0 wideband technology allowing us to offer faster high-speed Internet service. Telephone Services In 2010, residential telephone services represented approximately 12% of our total revenues. We provide voice communications services primarily using VoIP technology to transmit digital voice signals over our systems. Charter Telephone includes unlimited nationwide and in-state calling, voic , call waiting, caller ID, call forwarding and other features. Charter Telephone also provides international calling either by the minute or in a package of 250 minutes per month. Commercial Services In 2010, commercial services represented approximately 7% of our total revenues. Commercial services, offered through Charter Business, include scalable broadband communications solutions for business organizations, such as business-to-business Internet access, data networking, fiber connectivity to cellular towers, video and music entertainment services, and business telephone. We are investing in commercial business for connection growth and scaling operating platforms and systems for larger and broader customer needs. Sale of Advertising In 2010, sales of advertising represented approximately 4% of our total revenues. We receive revenues from the sale of local advertising on satellite-delivered networks such as MTV, CNN and ESPN. In any particular market, we generally insert local advertising on up to 40 channels. We also provide crosschannel advertising to some programmers. In 2010, Charter began deployment of Enhanced TV Binary Interchange Format ( EBIF ) technology to set top boxes in select service areas within the Charter footprint. EBIF is a technology foundation that will allow Charter to deliver enhanced and interactive television applications and enable our video customers to use their remote control to interact with their television programming and its advertisements. EBIF will enable Charter s customers to request such items as coupons, samples, and brochures from advertisers and also will enable advertisers to reach audiences in new ways. From time to time, certain of our vendors, including programmers and equipment vendors, have purchased advertising from us. For the years ending December 31, 2010, 2009 and 2008, we had advertising revenues from vendors of approximately $46 million, $41 million, and $39 million, respectively. These revenues resulted from purchases at market rates pursuant to binding agreements. Pricing of Our Products and Services Our revenues are derived principally from the monthly fees customers pay for the services we provide. We typically charge a one-time installation fee which is sometimes waived or discounted during certain promotional periods. The prices we charge for our products and services vary based on the level of service the customer chooses and the geographic market. In accordance with FCC rules, the prices we charge for video cable-related equipment, such as set-top boxes and remote control devices, and for installation services, are based on actual costs plus a permitted rate of return in regulated markets. We offer reduced-price service for promotional periods in order to attract new customers, to promote the bundling of two or more services and to retain existing customers. We often also offer a two-year price guarantee to our customers. There is no assurance that these customers will remain as customers when the promotional pricing period 6

12 expires. When customers bundle services, generally the prices are lower per service than if they had only purchased a single service. Approximately 61% of our customers subscribe to a bundle of services. Our Network Technology Our network utilizes the hybrid fiber coaxial cable ( HFC ) architecture, which combines the use of fiber optic cable with coaxial cable. In most systems, we deliver our signals via fiber optic cable from the headend to a group of nodes, and use coaxial cable to deliver the signal from individual nodes to the homes passed served by that node. On average, our system design enables up to 400 homes passed to be served by a single node and provides for six strands of fiber to each node, with two strands activated and four strands reserved for spares and future services. We believe that this hybrid network design provides high capacity and signal quality. The design also provides two-way signal capacity for the addition of further interactive services. HFC architecture benefits include: bandwidth capacity to enable traditional and two-way video and broadband services; dedicated bandwidth for two-way services, which avoids return signal interference problems that can occur with two-way communication capability; and signal quality and high service reliability. The following table sets forth the technological capacity of our systems as of December 31, 2010 based on a percentage of homes passed: Less than Two-way 550 MHz 550 MHz 750 MHz 860/870 MHz activated 2% 5% 46% 47% 97% Approximately 98% of our homes passed are served by systems that have bandwidth of 550 megahertz or greater. This bandwidth capacity enables us to offer digital television, high-speed Internet services, telephone service and other advanced video services. Through system upgrades and divestitures of non-strategic systems, we have reduced the number of headends that serve our customers from 1,138 at January 1, 2001 to 204 at December 31, Headends are the control centers of a cable system. Reducing the number of headends reduces related equipment, service personnel, and maintenance expenditures. As of December 31, 2010, approximately 93% of our customers were served by headends serving at least 10,000 customers. As of December 31, 2010, our cable systems consisted of approximately 195,000 aerial and underground miles of coaxial cable, and approximately 55,000 aerial and underground miles of fiber optic cable, passing approximately 11.8 million households and serving approximately 5.1 million customers. Charter has built and activated a national transport backbone inter-connecting 95% of Charter s local and regional networks. The backbone is highly scalable enabling efficient and timely transport of Internet traffic, voice traffic, and high definition video content distribution. In 2010, we deployed DOCSIS 3.0 wideband technology to 57% of our homes passed allowing us to offer faster high-speed Internet service. In 2011, we expect our roll-out of DOCSIS 3.0 to be substantially complete. We have also deployed SDV technology to accommodate the increasing demands for greater capacity in our network. SDV technology expands network capacity by transmitting only those digital and HD video channels that are being watched within a given grouping of homes at any given time which allows us to expand bandwidth for additional services. As of December 31, 2010, 63% of our homes passed received some portion of their video service via SDV technology, and we expect to substantially complete our roll-out of SDV technology in Management, Customer Care and Marketing Our corporate office, which includes employees of Charter, is responsible for coordinating and overseeing operations including establishing company-wide policies and procedures. The corporate office performs certain financial and administrative functions on a centralized basis and performs these services on a cost reimbursement 7

13 basis pursuant to a management services agreement with one of our subsidiaries. Our field operations are managed by geographic areas with shared service centers for our field sales and marketing function, human resources and training function, finance, and certain areas of customer operations. Our customer care centers are managed centrally. We have eight internal customer care locations including our centers of excellence which route calls to the appropriate agents, plus several third-party call center locations that through technology and procedures function as an integrated system. We provide service to our customers 24 hours a day, seven days a week. We also utilize our website to enable our customers to view and pay their bills online, obtain information regarding their account or services, and perform various equipment troubleshooting procedures. Our customers may also obtain support through our on-line chat and functionality. Our marketing strategy emphasizes our bundled services through targeted marketing programs to existing and potential customers and increases awareness and value of the Charter brand. Marketing expenditures increased by $14 million, or 5%, over the year ended December 31, 2009 to $286 million for the year ended December 31, Our marketing organization creates and executes marketing programs intended to increase customers, retain existing customers and cross-sell additional products to current customers. We monitor the effectiveness of our marketing efforts, customer perception, competition, pricing, and service preferences, among other factors, to increase our responsiveness to our customers. Programming General We believe that offering a wide variety of programming influences a customer s decision to subscribe to and retain our cable services. We rely on market research, customer demographics and local programming preferences to determine channel offerings in each of our markets. We obtain basic and premium programming from a number of suppliers, usually pursuant to written contracts. Our programming contracts generally continue for a fixed period of time, usually from three to ten years, and are subject to negotiated renewal. Some programming suppliers offer financial incentives to support the launch of a channel and/or ongoing marketing support. We also negotiate volume discount pricing structures. Programming costs are usually payable each month based on calculations performed by us and are generally subject to annual cost escalations and audits by the programmers. Costs Programming is usually made available to us for a license fee, which is generally paid based on the number of customers to whom we make such programming available. Such license fees may include volume discounts available for higher numbers of customers, as well as discounts for channel placement or service penetration. Some channels are available without cost to us for a limited period of time, after which we pay for the programming. For home shopping channels, we receive a percentage of the revenue attributable to our customers purchases, as well as, in some instances, incentives for channel placement. Our programming costs have increased in every year we have operated in excess of customary inflationary and cost-of-living type increases. We expect them to continue to increase, and at a higher rate than in 2010, due to a variety of factors including amounts paid for retransmission consent, annual increases imposed by programmers and additional programming, including high-definition and OnDemand programming. In particular, sports programming costs have increased significantly over the past several years. In addition, contracts to purchase sports programming sometimes provide for optional additional programming to be available on a surcharge basis during the term of the contract. Federal law allows commercial television broadcast stations to make an election between must-carry rights and an alternative retransmission-consent regime. When a station opts for the retransmission-consent regime, we are not allowed to carry the station s signal without the station s permission. Continuing demands by owners of broadcast stations for carriage of other services or cash payments to those broadcasters in exchange for retransmission consent will likely increase our programming costs or require us to cease carriage of popular programming, potentially leading to a loss of customers in affected markets. Over the past several years, increases in our video service rates have not fully offset increasing programming costs, and with the impact of increasing competition and other marketplace factors, we do not expect them to do so in the foreseeable future. In addition, our inability to fully pass these programming cost increases on to our video 8

14 customers has had and is expected in the future to have an adverse impact on our cash flow and operating margins associated with the video product. In order to mitigate reductions of our operating margins due to rapidly increasing programming costs, we continue to review our pricing and programming packaging strategies, and we plan to continue to migrate certain program services from our basic level of service to our digital tiers. As we migrate our programming to our digital tier packages, certain programming that was previously available to all of our customers via an analog signal may only be part of an elective digital tier package offered to our customers for an additional fee. As a result, we expect that the customer base upon which we pay programming fees will proportionately decrease, and the overall expense for providing that service will also decrease. However, reductions in the size of certain programming customer bases may result in the loss of specific volume discount benefits. We have programming contracts that have expired and others that will expire at or before the end of We will seek to renegotiate the terms of these agreements. There can be no assurance that these agreements will be renewed on favorable or comparable terms. To the extent that we are unable to reach agreement with certain programmers on terms that we believe are reasonable, we have been, and may in the future be, forced to remove such programming channels from our line-up, which may result in a loss of customers. Franchises As of December 31, 2010, our systems operated pursuant to a total of approximately 3,000 franchises, permits, and similar authorizations issued by local and state governmental authorities. Such governmental authorities often must approve a transfer to another party. Most franchises are subject to termination proceedings in the event of a material breach. In addition, most franchises require us to pay the granting authority a franchise fee of up to 5.0% of revenues as defined in the various agreements, which is the maximum amount that may be charged under the applicable federal law. We are entitled to and generally do pass this fee through to the customer. Prior to the scheduled expiration of most franchises, we generally initiate renewal proceedings with the granting authorities. This process usually takes three years but can take a longer period of time. The Communications Act of 1934, as amended (the Communications Act ), which is the primary federal statute regulating interstate communications, provides for an orderly franchise renewal process in which granting authorities may not unreasonably withhold renewals. In connection with the franchise renewal process, many governmental authorities require the cable operator to make certain commitments, such as building out certain of the franchise areas, customer service requirements, and supporting and carrying public access channels. Historically we have been able to renew our franchises without incurring significant costs, although any particular franchise may not be renewed on commercially favorable terms or otherwise. Our failure to obtain renewals of our franchises, especially those in the major metropolitan areas where we have the most customers, could have a material adverse effect on our consolidated financial condition, results of operations, or our liquidity, including our ability to comply with our debt covenants. See Regulation and Legislation Video Services Franchise Matters. Competition We face competition for both residential and commercial customers in the areas of price, service offerings, and service reliability. We compete with other providers of video, high-speed Internet access, telephone services, and other sources of home entertainment. We operate in a very competitive business environment, which can adversely affect the results of our business and operations. We cannot predict the impact on us of broadband services offered by our competitors. In terms of competition for customers, we view ourselves as a member of the broadband communications industry, which encompasses multi-channel video for television and related broadband services, such as high-speed Internet, telephone, and other interactive video services. In the broadband communications industry, our principal competitor for video services throughout our territory is direct broadcast satellite ( DBS ) and our principal competitor for high-speed Internet services is DSL service provided by telephone companies. Our principal competitors for telephone services are established telephone companies, other telephone service providers, and other carriers, including VoIP providers. Based on telephone companies entry into video service and the upgrades of their networks, they have become significant competitors for both high-speed Internet and video customers. At this time, we do not consider other cable operators to be significant competitors in our overall market, as overbuilds are infrequent and geographically spotty (although in any particular market, a cable operator overbuilder would likely be a significant competitor at the local level). 9

15 Our key competitors include: DBS Direct broadcast satellite is a significant competitor to cable systems. The two largest DBS providers now serve more than 33 million subscribers nationwide. DBS service allows the subscriber to receive video services directly via satellite using a dish antenna. Video compression technology and high powered satellites allow DBS providers to offer more than 280 digital channels from a single satellite, thereby surpassing the traditional analog cable system. In 2010, major DBS competitors offered a greater variety of channel packages, and were especially competitive with promotional pricing for more basic services. While we continue to believe that the initial investment by a DBS customer exceeds that of a cable customer, the initial equipment cost for DBS has decreased substantially, as the DBS providers have aggressively marketed offers to new customers of incentives for discounted or free equipment, installation, and multiple units. DBS providers are able to offer service nationwide and are able to establish a national image and branding with standardized offerings, which together with their ability to avoid franchise fees of up to 5% of revenues and property tax, leads to greater efficiencies and lower costs in the lower tiers of service. Also, DBS providers are currently offering more high definition programming, including local high definition programming. However, we believe that cable-delivered OnDemand and Subscription OnDemand services, which include HD programming, are superior to DBS service, because cable headends can provide two-way communication to deliver many titles which customers can access and control independently, whereas DBS technology can only make available a much smaller number of titles with DVR-like customer control. DBS providers have also made attempts at deployment of high-speed Internet access services via satellite, but those services have been technically constrained and of limited appeal. Telephone Companies and Utilities Our telephone service competes directly with established telephone companies and other carriers, including Internet-based VoIP providers, for voice service customers. Because we offer voice services, we are subject to considerable competition from telephone companies and other telecommunications providers, including wireless providers with an increasing number of consumers choosing wireless over wired telephone services. The telecommunications and competitive voice services industry is highly competitive and includes competitors with greater financial and personnel resources, strong brand name recognition, and long-standing relationships with regulatory authorities and customers. Moreover, mergers, joint ventures and alliances among our competitors have resulted in providers capable of offering cable television, Internet, and telephone services in direct competition with us. Most telephone companies, which already have plant, an existing customer base, and other operational functions in place (such as billing and service personnel), offer DSL service. DSL service allows Internet access to subscribers at data transmission speeds greater than those available over conventional telephone lines. We believe DSL service is competitive with high-speed Internet service and is often offered at prices lower than our Internet services, although typically at speeds lower than the speeds we offer. However, DSL providers may currently be in a better position to offer data services to businesses since their networks tend to be more complete in commercial areas. We expect DSL to remain a significant competitor to our high-speed Internet services. In addition, the continuing deployment of fiber optics into telephone companies networks (primarily by Verizon Communications, Inc. ( Verizon )) will enable them to provide even higher bandwidth Internet services. Telephone companies, including AT&T Inc. ( AT&T ) and Verizon, offer video and other services in competition with us, and we expect they will increasingly do so in the future. Upgraded portions of these networks carry two-way video, data services and provide digital voice services similar to ours. In the case of Verizon, high-speed data services (fiber optic service ( FiOS )) offer speeds as high as or higher than ours. In addition, these companies continue to offer their traditional telephone services, as well as service bundles that include wireless voice services provided by affiliated companies. Based on internal estimates, we believe that AT&T and Verizon are offering video services in areas serving approximately 24% to 29% and 3%, respectively, of our estimated homes passed as of December 31, 2010 and we have experienced customer losses in these areas. AT&T and Verizon have also launched campaigns to capture more of the multiple dwelling unit ( MDU ) market. Additional upgrades and product launches are expected in markets in which we operate. In addition to telephone companies obtaining franchises or alternative authorizations in some areas, and seeking them in others, they have been successful through various means in reducing or streamlining the franchising requirements applicable to them. They have had significant success at the federal and state level in securing FCC 10

16 rulings and numerous statewide franchise laws that facilitate telephone company entry into the video marketplace. Because telephone companies have been successful in avoiding or reducing franchise and other regulatory requirements that remain applicable to cable operators like us, their competitive posture has often been enhanced. The large scale entry of major telephone companies as direct competitors in the video marketplace has adversely affected the profitability and valuation of our cable systems. Additionally, we are subject to limited competition from utilities that possess fiber optic transmission lines capable of transmitting signals with minimal signal distortion. Certain utilities are also developing broadband over power line technology, which may allow the provision of Internet and other broadband services to homes and offices. Broadcast Television Cable television has long competed with broadcast television, which consists of television signals that the viewer is able to receive without charge using an off-air antenna. The extent of such competition is dependent upon the quality and quantity of broadcast signals available through off-air reception, compared to the services provided by the local cable system. Traditionally, cable television has provided higher picture quality and more channel offerings than broadcast television. However, the recent licensing of digital spectrum by the FCC now provides traditional broadcasters with the ability to deliver high definition television pictures and multiple digital-quality program streams, as well as advanced digital services such as subscription video and data transmission. Traditional Overbuilds Cable systems are operated under non-exclusive franchises historically granted by state and local authorities. More than one cable system may legally be built in the same area. It is possible that a franchising authority might grant a second franchise to another cable operator and that such franchise might contain terms and conditions more favorable than those afforded us. Well-financed businesses from outside the cable industry, such as public utilities that already possess fiber optic and other transmission lines in the areas they serve, may over time become competitors. There are a number of cities that have constructed their own cable systems, in a manner similar to city-provided utility services. There also has been interest in traditional cable overbuilds by private companies not affiliated with established local exchange carriers. Constructing a competing cable system is a capital intensive process which involves a high degree of risk. We believe that in order to be successful, a competitor s overbuild would need to be able to serve the homes and businesses in the overbuilt area with equal or better service quality, on a more cost-effective basis than we can. Any such overbuild operation would require access to capital or access to facilities already in place that are capable of delivering cable television programming. As of December 31, 2010, excluding telephone companies, we are aware of traditional overbuild situations impacting approximately 7% to 9% of our total homes passed and potential traditional overbuild situations in areas servicing approximately an additional 1% of our total homes passed. Additional overbuild situations may occur. Private Cable Additional competition is posed by satellite master antenna television systems, or SMATV systems, serving MDUs, such as condominiums, apartment complexes, and private residential communities. Private cable systems can offer improved reception of local television stations, and many of the same satellite-delivered program services that are offered by cable systems. Although disadvantaged from a programming cost perspective, SMATV systems currently benefit from operating advantages not available to franchised cable systems, including fewer regulatory burdens and no requirement to service low density or economically depressed communities. The FCC previously adopted regulations that favor SMATV and private cable operators serving MDU complexes, allowing them to continue to secure exclusive contracts with MDU owners. This regulatory disparity provides a competitive advantage to certain of our current and potential competitors. Other Competitors Local wireless Internet services operate in some markets using available unlicensed radio spectrum. Various wireless phone companies are now offering third and fourth generation (3G and 4G) wireless high-speed Internet services. In addition, a growing number of commercial areas, such as retail malls, restaurants and airports, offer Wi-Fi Internet service. Numerous local governments are also considering or actively pursuing publicly subsidized Wi-Fi and WiMAX Internet access networks. Operators are also marketing PC cards and personal hotspots offering wireless broadband access to their cellular networks. These service options offer another alternative to cable-based Internet access. 11